“Damn, I’m going to have to part company with Debbie – how do I even do that?”
Firing a co-founder isn't like an employee termination, it's more like a divorce. It's messy, it's complicated, and it usually involves both parties being poorer for it.
But unlike a divorce, there's not a lot of discussion out there about what is even possible or where to turn.
Let’s dig in, shall we?
As an employee, almost anyone can be fired, although there may be jurisdictional laws in your area of the world that require certain steps or conditions.
But co-founders are typically not just employees – they own stock (usually, a lot of it) – so these conditions become far more complicated. Plus, some of these issues may exist beyond employment in the by-laws of the company (sometimes known as the "Operating Agreement").
So in most cases, you're splitting up twice – once as an employee, and again as a stockholder.
Typically the stock goes back into the company pool and is re-distributed pro-rata amongst the existing holders, but that's just one scenario.
There may be cases where different classes of stock are held (common vs. preferred) and therefore the re-provisioning of stock gets more complicated and almost certainly involves a qualified attorney.
Do I have to "buy them out?"
Not necessarily. However, if you don't buy their stock (in most cases) they will still own the stock unless that stock hasn't "vested" in which case it returns the company as a whole.
Regardless, if there isn't a plan to compensate the co-founder, then just firing them typically won't affect their stock holding, but nothing requires that they are compensated if no stock changes hands.
Firing a co-founder is way more complex than firing an employee.
The approach needs to be in terms of how the company itself will exist post-firing, meaning who will hold what rights within the company as well as stock, cash and other assets.
The remaining Founders, advisors, and investors need to prepare a plan for exactly what grounds the co-founder will be fired on (which may trigger different treatment in the corporate by-laws), how the existing stock will be treated, and what a fair and equitable compensation plan looks like — if any.
How to find the right co-founders? 8X Silicon Valley serial entrepreneur Steve Blank explains how to determine the right mix of skills for the co-founders of your startup.
Saving your startup from co-founder conflict. Meghdad Abbaszadegan, advisor with LA and Phoenix-based startup Coplex, discusses how to keep your startup from failing due to co-founder disagreements.
11 ways successful co-founders balance roles and responsibilities. The Young Entrepreneur Council, an invite-only organization comprised of the world’s most promising young entrepreneurs, breaks down how to define and balance co-founder roles and responsibilities.
Wil Schroter is the Founder + CEO @ Startups.com, a startup platform that includes Bizplan, Clarity, Fundable, Launchrock, and Zirtual. He started his first company at age 19 which grew to over $700 million in billings within 5 years (despite his involvement). After that he launched 8 more companies, the last 3 venture backed, to refine his learning of what not to do. He's a seasoned expert at starting companies and a total amateur at everything else.